Edison
Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
2019
(Unaudited)
|
|
|
December 31,
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,425,059
|
|
|
$
|
2,052,731
|
|
Accounts receivable, net
|
|
|
3,092,506
|
|
|
|
1,877,351
|
|
Inventory
|
|
|
1,260,251
|
|
|
|
923,707
|
|
Prepaid expenses and other current assets
|
|
|
890,463
|
|
|
|
611,695
|
|
Income tax receivable
|
|
|
31,563
|
|
|
|
-
|
|
Total current assets
|
|
|
6,699,842
|
|
|
|
5,465,484
|
|
Property and equipment, net
|
|
|
1,011,183
|
|
|
|
998,863
|
|
Right of use assets – operating leases, net
|
|
|
802,223
|
|
|
|
-
|
|
Intangible assets, net
|
|
|
12,148,611
|
|
|
|
12,687,731
|
|
Goodwill
|
|
|
9,736,510
|
|
|
|
9,736,510
|
|
Total assets
|
|
$
|
30,398,369
|
|
|
$
|
28,888,588
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,710,411
|
|
|
$
|
5,519,159
|
|
Accrued expenses and other current liabilities
|
|
|
1,787,949
|
|
|
|
1,135,551
|
|
Deferred revenues
|
|
|
175,956
|
|
|
|
175,956
|
|
Current portion of operating lease liabilities
|
|
|
199,690
|
|
|
|
-
|
|
Income tax payable
|
|
|
-
|
|
|
|
129,511
|
|
Line of credit, net of debt issuance costs of $23,359 and
$31,145, respectively
|
|
|
748,048
|
|
|
|
531,804
|
|
Current portion of convertible notes payable, net of debt
issuance costs of $192,607 and $0, respectively
|
|
|
918,504
|
|
|
|
-
|
|
Current portion of notes payable, net of debt issuance costs
of $74,667 and $0, respectively
|
|
|
789,214
|
|
|
|
313,572
|
|
Current portion of notes payable – related parties
|
|
|
1,016,917
|
|
|
|
932,701
|
|
Due to related party
|
|
|
75,082
|
|
|
|
140,682
|
|
Total current liabilities
|
|
|
12,421,771
|
|
|
|
8,878,936
|
|
Contingent consideration
|
|
|
520,000
|
|
|
|
520,000
|
|
Operating lease liabilities, net of current portion
|
|
|
613,809
|
|
|
|
-
|
|
Convertible notes payable – related parties, net of debt discount of $416,667
and $466,667 related to the conversion feature, respectively
|
|
|
1,011,494
|
|
|
|
961,494
|
|
Notes payable, net of current portion
|
|
|
49,669
|
|
|
|
56,688
|
|
Notes payable – related parties, net of current portion
|
|
|
2,406,277
|
|
|
|
2,531,490
|
|
Deferred tax liability
|
|
|
341
|
|
|
|
341
|
|
Total liabilities
|
|
|
17,023,361
|
|
|
|
12,948,949
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 250,000,000 shares authorized; 5,737,830 and 5,654,830 shares
issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
|
|
|
5,738
|
|
|
|
5,655
|
|
Additional paid-in-capital
|
|
|
21,136,912
|
|
|
|
20,548,164
|
|
Accumulated deficit
|
|
|
(8,736,463
|
)
|
|
|
(5,565,756
|
)
|
Total stockholders’ equity attributable to Edison
Nation, Inc.
|
|
|
12,406,187
|
|
|
|
14,988,063
|
|
Noncontrolling interests
|
|
|
968,821
|
|
|
|
951,576
|
|
Total stockholders’ equity
|
|
|
13,375,008
|
|
|
|
15,939,639
|
|
Total liabilities and stockholders’
equity
|
|
$
|
30,398,369
|
|
|
$
|
28,888,588
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues, net
|
|
$
|
5,968,255
|
|
|
$
|
4,387,197
|
|
|
$
|
11,706,789
|
|
|
$
|
7,818,527
|
|
Cost of revenues
|
|
|
3,924,252
|
|
|
|
3,124,221
|
|
|
|
7,869,810
|
|
|
|
5,453,215
|
|
Gross profit
|
|
|
2,044,003
|
|
|
|
1,262,976
|
|
|
|
3,836,979
|
|
|
|
2,365,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,392,596
|
|
|
|
1,658,438
|
|
|
|
6,441,784
|
|
|
|
4,211,175
|
|
Operating loss
|
|
|
(1,348,593
|
)
|
|
|
(395,462
|
)
|
|
|
(2,604,805
|
)
|
|
|
(1,845,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
25,703
|
|
|
|
25,703
|
|
|
|
51,407
|
|
|
|
51,407
|
|
Interest expense
|
|
|
(401,170
|
)
|
|
|
(277,602
|
)
|
|
|
(525,864
|
)
|
|
|
(365,137
|
)
|
Total other (expense) income
|
|
|
(375,467
|
)
|
|
|
(251,899
|
)
|
|
|
(474,457
|
)
|
|
|
(313,730
|
)
|
Loss before income taxes
|
|
|
(1,724,060
|
)
|
|
|
(647,361
|
)
|
|
|
(3,079,262
|
)
|
|
|
(2,159,593
|
)
|
Income tax expense
|
|
|
51,005
|
|
|
|
79,300
|
|
|
|
74,200
|
|
|
|
144,373
|
|
Net loss
|
|
$
|
(1,775,065
|
)
|
|
$
|
(726,661
|
)
|
|
$
|
(3,153,462
|
)
|
|
$
|
(2,303,966
|
)
|
Net (loss) income attributable
to noncontrolling interests
|
|
|
(39,648
|
)
|
|
|
-
|
|
|
|
17,245
|
|
|
|
-
|
|
Net loss attributable to Edison
Nation, Inc.
|
|
$
|
(1,735,417
|
)
|
|
$
|
(726,661
|
)
|
|
$
|
(3,170,707
|
)
|
|
$
|
(2,303,966
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic and diluted
|
|
$
|
(0.30
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.66
|
)
|
Weighted average number of common shares outstanding
– basic and diluted
|
|
|
5,702,693
|
|
|
|
3,932,084
|
|
|
|
5,682,150
|
|
|
|
3,468,617
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
For the Three Months
Ended June 30, 2019 and 2018
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity (Deficit)
|
|
Balance, April 1, 2019
|
|
|
5,680,330
|
|
|
$
|
5,680
|
|
|
$
|
20,859,158
|
|
|
$
|
(7,001,046
|
)
|
|
$
|
1,008,469
|
|
|
$
|
14,872,261
|
|
Issuance of common stock to note holders
|
|
|
35,000
|
|
|
|
35
|
|
|
|
99,165
|
|
|
|
-
|
|
|
|
-
|
|
|
|
99,200
|
|
Issuance of common stock to vendors for services
|
|
|
22,500
|
|
|
|
23
|
|
|
|
88,602
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88,625
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
89,987
|
|
|
|
-
|
|
|
|
-
|
|
|
|
89,987
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,735,417
|
)
|
|
|
(39,648
|
)
|
|
|
(1,775,065
|
)
|
Balance, June 30, 2019
|
|
|
5,737,830
|
|
|
$
|
5,738
|
|
|
$
|
21,136,912
|
|
|
$
|
(8,736,463
|
)
|
|
$
|
968,821
|
|
|
$
|
13,375,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 1, 2018
|
|
|
3,000,000
|
|
|
$
|
3,000
|
|
|
$
|
1,721,250
|
|
|
$
|
(1,812,935
|
)
|
|
$
|
-
|
|
|
$
|
(88,685
|
)
|
Sale of common stock – investors in the IPO
|
|
|
1,294,230
|
|
|
|
1,294
|
|
|
|
6,469,856
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,471,150
|
|
Shares to be issued to investors in the IPO
|
|
|
-
|
|
|
|
-
|
|
|
|
91,450
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91,450
|
|
Offering costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,204,030
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,204,030
|
)
|
Issuance of common stock to employees
|
|
|
61,200
|
|
|
|
61
|
|
|
|
305,939
|
|
|
|
-
|
|
|
|
-
|
|
|
|
306,000
|
|
Issuance of common stock to note holders
|
|
|
13,500
|
|
|
|
14
|
|
|
|
67,486
|
|
|
|
|
|
|
|
|
|
|
|
67,500
|
|
Shares to be issued to note holders
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(726,661
|
)
|
|
|
-
|
|
|
|
(726,661
|
)
|
Balance, June 30, 2018
|
|
|
4,368,930
|
|
|
$
|
4,369
|
|
|
$
|
7,551,951
|
|
|
$
|
(2,539,596
|
)
|
|
|
-
|
|
|
$
|
5,016,724
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
For the Six Months Ended
June 30, 2019 and 2018
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity (Deficit)
|
|
Balance, December 31, 2018
|
|
|
5,654,830
|
|
|
$
|
5,655
|
|
|
$
|
20,548,164
|
|
|
$
|
(5,565,756
|
)
|
|
$
|
951,576
|
|
|
$
|
15,939,639
|
|
Issuance of common stock to note holders
|
|
|
50,000
|
|
|
|
50
|
|
|
|
173,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
173,300
|
|
Issuance of common stock to vendors for services
|
|
|
33,000
|
|
|
|
33
|
|
|
|
141,092
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141,125
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
274,406
|
|
|
|
-
|
|
|
|
-
|
|
|
|
274,406
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,170,707
|
)
|
|
|
17,245
|
|
|
|
(3,153,462
|
)
|
Balance, June 30, 2019
|
|
|
5,737,830
|
|
|
$
|
5,738
|
|
|
$
|
21,136,912
|
|
|
$
|
(8,736,463
|
)
|
|
$
|
968,821
|
|
|
$
|
13,375,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
3,000,000
|
|
|
$
|
3,000
|
|
|
$
|
-
|
|
|
$
|
(235,630
|
)
|
|
$
|
-
|
|
|
$
|
(232,630
|
)
|
Sale of common stock – investors in the IPO
|
|
|
1,294,230
|
|
|
|
1,294
|
|
|
|
6,469,856
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,471,150
|
|
Shares to be issued to investors in the IPO
|
|
|
-
|
|
|
|
-
|
|
|
|
91,450
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91,450
|
|
Offering costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,204,030
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,204,030
|
)
|
Issuance of common stock to employees
|
|
|
61,200
|
|
|
|
61
|
|
|
|
305,939
|
|
|
|
-
|
|
|
|
-
|
|
|
|
306,000
|
|
Issuance of common stock to note holders
|
|
|
13,500
|
|
|
|
14
|
|
|
|
67,486
|
|
|
|
|
|
|
|
|
|
|
|
67,500
|
|
Shares to be issued to note holders
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,721,250
|
|
|
|
|
|
|
|
|
|
|
|
1,721,250
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,303,966
|
)
|
|
|
-
|
|
|
|
(2,303,966
|
)
|
Balance, June 30, 2018
|
|
|
4,368,930
|
|
|
$
|
4,369
|
|
|
$
|
7,551,951
|
|
|
$
|
(2,539,596
|
)
|
|
|
-
|
|
|
$
|
5,016,724
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash Flow from Operating Activities
|
|
|
|
|
|
|
|
|
Net loss attributable to Edison Nation, Inc.
|
|
$
|
(3,170,707
|
)
|
|
$
|
(2,303,966
|
)
|
Net income attributable to noncontrolling interests
|
|
|
17,245
|
|
|
|
-
|
|
Net loss
|
|
|
(3,153,462
|
)
|
|
|
(2,303,966
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
633,570
|
|
|
|
79,262
|
|
Amortization of financing costs
|
|
|
391,223
|
|
|
|
266,944
|
|
Stock-based compensation
|
|
|
708,490
|
|
|
|
2,027,250
|
|
Amortization of right of use asset
|
|
|
155,408
|
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,215,155
|
)
|
|
|
(224,266
|
)
|
Inventory
|
|
|
(336,544
|
)
|
|
|
12,431
|
|
Prepaid expenses and other current assets
|
|
|
(561,331
|
)
|
|
|
(1,118,270
|
)
|
Accounts payable
|
|
|
1,191,252
|
|
|
|
148,709
|
|
Accrued expenses and other current liabilities
|
|
|
480,928
|
|
|
|
248,473
|
|
Repayment of operating lease liabilities
|
|
|
(144,132
|
)
|
|
|
-
|
|
Due from related party
|
|
|
(65,600
|
)
|
|
|
(416,062
|
)
|
Net cash used
in operating activities
|
|
|
(1,915,353
|
)
|
|
|
(1,279,495
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(106,770
|
)
|
|
|
(27,462
|
)
|
Purchase of loan held for investment
|
|
|
-
|
|
|
|
(500,000
|
)
|
Net cash used
in investing activities
|
|
|
(106,770
|
)
|
|
|
(527,462
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Borrowings under lines of credit
|
|
|
240,000
|
|
|
|
-
|
|
Borrowings under convertible notes payable
|
|
|
1,111,111
|
|
|
|
-
|
|
Borrowings under notes payable
|
|
|
1,110,000
|
|
|
|
645,000
|
|
Repayments under lines of credit
|
|
|
(31,542
|
)
|
|
|
-
|
|
Repayments under notes payable
|
|
|
(566,710
|
)
|
|
|
(645,000
|
)
|
Repayments under notes payable – related parties
|
|
|
(40,997
|
)
|
|
|
(78,593
|
)
|
Net proceeds from sale of common stock
|
|
|
-
|
|
|
|
5,358,570
|
|
Fees paid for financing costs
|
|
|
(427,411
|
)
|
|
|
(99,444
|
)
|
Net cash provided
by financing activities
|
|
|
1,394,451
|
|
|
|
5,180,533
|
|
Net (decrease) increase in cash and
cash equivalents
|
|
|
(627,672
|
)
|
|
|
3,373,576
|
|
Cash and cash equivalents - beginning
of period
|
|
|
2,052,731
|
|
|
|
557,268
|
|
Cash and cash equivalents - end of
period
|
|
$
|
1,425,059
|
|
|
|
3,930,844
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
74,908
|
|
|
$
|
34,757
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Noncash investing and financing activity:
|
|
|
|
|
|
|
|
|
Shares issued to note holders
|
|
$
|
173,300
|
|
|
$
|
67,500
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
Edison
Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Basis of Presentation and Nature of Operations
The condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of
the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information
and footnotes required by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts
of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated
in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial
statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position
of the Company as of June 30, 2019 and the results of operations, changes in stockholders’ equity, and cash flows for the
periods presented. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of
the operating results for the full fiscal year for any future period.
These condensed
consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The Company’s accounting
policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended
December 31, 2018, and updated, as necessary, in this Quarterly Report on Form 10-Q.
As used herein,
the terms the “Company,” “Edison Nation” “we,” “us,” “our” and similar
refer to Edison Nation, Inc., a Nevada corporation incorporated on July 18, 2017 under the laws of the State of Nevada as Idea
Lab X Products, Inc. and also formerly known as Xspand Products Lab, Inc. prior to its name change on September 12, 2018, and/or
its wholly-owned and majority-owned operating subsidiaries, and/or where applicable, its management.
Edison Nation
is a vertically-integrated, end-to-end, consumer product research & development, manufacturing, sales and fulfillment company.
The Company’s proprietary web-enabled platform provides a low risk, high reward platform and process to connect innovators
of new product ideas with potential licensees.
As of June 30, 2019, Edison Nation, Inc.
had five wholly-owned subsidiaries: S.R.M. Entertainment Limited (“SRM”), Ferguson Containers, Inc. (“Fergco”),
CBAV1, LLC (“CB1”), Pirasta, LLC and Edison Nation Holdings, LLC (“EN”). Edison Nation, Inc. owns 72.15%
of Cloud B, Inc. and 50% of Best Party Concepts, LLC. Edison Nation Holdings, LLC is the single member of Edison Nation, LLC and
Everyday Edisons, LLC. Edison Nation, LLC is the single member of Safe TV Shop, LLC. Cloud B, Inc. owns 100% of Cloud B UK and
Cloud B Australia.
Liquidity
For the three and six months ended June
30, 2019, our operations lost $1,348,593 and $2,604,805, respectively. At June 30, 2019, we had total current assets of approximately
$6,700,000 and current liabilities of approximately $12,400,000 resulting in negative working capital of approximately $5,700,000.
At June 30, 2019, we had total assets of approximately $30,400,000 and total liabilities of approximately $17,000,000 resulting
in stockholders’ equity of approximately $13,400,000.
The foregoing factors raised initial concerns
about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon
the Company’s ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies
and achieve profitable operations from the sale of its products. The consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern. The following is additional information on our
operating losses and working capital:
The Company’s operating loss included
$678,258 and $1,342,060 related to depreciation, amortization and stock-based compensation. In addition, approximately $654,000
and $1,000,000, respectively, was related to transaction costs, restructuring charges and other non-recurring and redundant costs
which are being removed or reduced. The negative working capital includes approximately $3,800,000 related to unsecured trade
payables in our Cloud B acquisition. In addition, our outstanding balances under notes payable includes $0.9 million related to
Cloud B, Inc. CBAV1, LLC, a wholly-owned subsidiary of Edison Nation, Inc., owns the senior secured position on the promissory
note to Cloud B, Inc. in the amount of $2,270,000. In February 2019, CBAV1, LLC, pursuant to an Article 9 foreclosure action,
perfected its secured UCC interest in all the assets of Cloud B, Inc. to partially satisfy the outstanding balance on the note
and thereby making any payments of such Cloud B trade payables and notes unlikely in the future. In addition, S.R.M Entertainment
Limited, a wholly-owned subsidiary of Edison Nation, Inc., was an unsecured creditor in the amount of approximately $1,700,000
which is not included in the $3,800,000 but at this time remains unpaid. The total liabilities of approximately $6,400,000, of
which $1,700,000 has been eliminated in consolidation, are not expected to be satisfied due to the foreclosure.
Management has considered possible mitigating
factors within our management plan on our ability to continue for at least a year from the date these financial statements are
filed. The following items are management plans:
|
·
|
Cloud B, Inc. liabilities are unlikely to be paid
due to CBAV1 LLC holding the senior secured position and its rights under the foreclosure to the remaining assets of the entity
to satisfy the outstanding obligation.
|
|
·
|
Raise further capital through the sale of additional equity;
|
|
·
|
Borrow money under debt securities;
|
|
·
|
The deferral of payments to related party debt holders for both principal
of approximately $1,000,000 and related interest expense;
|
|
·
|
Cost saving initiatives related to synergies
and the elimination of redundant costs of approximately $500,000, of which approximately $172,000 impacted the three months
ended June 30, 2019; and
|
|
·
|
Possible sale of certain brands to other manufacturers.
|
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies
Principles
of Consolidation
The consolidated
financial statements include the accounts of Edison Nation, Inc. and its wholly-owned and majority owned subsidiaries. All intercompany
balances and transactions have been eliminated.
Use
of Estimates
Preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the
financial statements.
The
Company’s significant estimates used in these financial statements include, but are not limited to, accounts receivable
reserves, the valuation allowance related to the Company’s deferred tax assets, the recoverability and useful lives of long-lived
assets, debt conversion features, stock-based compensation, certain assumptions related to the valuation of the reserved shares
and the assets acquired and liabilities assumed related to the Company’s acquisitions. Certain of the Company’s estimates
could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably
possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ
from those estimates.
Reclassifications
Certain reclassifications
have been made to prior year amounts to conform to current year presentation.
Cash
and Cash Equivalents
The Company has cash on deposit in several
financial institutions which, at times, may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance
limits. The Company has not experienced losses in such accounts and periodically evaluates the creditworthiness of its financial
institutions. The Company reduces its credit risk by placing its cash and cash equivalents with major financial institutions.
The Company had approximately $794,000 uninsured cash at June 30, 2019 of which approximately $747,000 was held in foreign bank
accounts not covered by FDIC insurance limits as of June 30, 2019.
Accounts Receivable
As
of June 30, 2019, the following customers represented more than 10% of total accounts receivable:
|
|
June 30,
|
|
|
|
2019
|
|
Customer A
|
|
|
18
|
%
|
Customer B
|
|
|
17
|
%
|
Inventory
Inventory
is recorded at the lower of cost or net realizable value on a first-in, first-out basis. The Company reduces the carrying value
of inventories for those items that are potentially excess, obsolete, or slow moving based on changes in customer demand, technology
developments, or other economic factors.
Revenue
Recognition
Generally,
the Company considers all revenues as arising from contracts with customers. Revenue is recognized based on the five step process
outlined in the Accounting Standards Codification (“ASC”) 606:
Step
1 – Identify the Contract with the Customer – A contract exists when (a) the parties to the contract have approved
the contract and are committed to perform their respective obligations, (b) the entity can identify each party’s rights
regarding the goods or services to be transferred, (c) the entity can identify the payment terms for the goods or services to
be transferred, (d) the contract has commercial substance and it is probably that the entity will collect substantially all of
the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
Step
2 – Identify Performance Obligations in the Contract – Upon execution of a contract, the Company identifies as performance
obligations each promise to transfer to the customer either (a) goods or services that are distinct, or (b) a series of distinct
goods or services that are substantially the same and have the same pattern of transfer to the customer. To the extent a contract
includes multiple promised goods or services, the Company must apply judgement to determine whether the goods or services are
capable of being distinct within the context of the contract. If these criteria are not met, the goods or services are accounted
for as a combined performance obligation.
Step
3 – Determine the Transaction Price – When (or as) a performance obligation is satisfied, the Company shall recognize
as revenue the amount of the transaction price that is allocated to the performance obligation. The contract terms are used to
determine the transaction price. Generally, all contracts include fixed consideration. If a contract did include variable consideration,
the Company would determine the amount of variable consideration that should be included in the transaction price based on expected
value method. Variable consideration would be included in the transaction price, if in the Company’s judgement, it is probable
that a significant future reversal of cumulative revenue under the contract would not occur.
Step
4 – Allocate the Transaction Price – After the transaction price has been determined, the next step is to allocate
the transaction price to each performance obligation in the contract. If the contract only has one performance obligation, the
entire transaction price will be applied to that obligation. If the contract has multiple performance obligations, the transaction
price is allocated to the performance obligations based on the relative standalone selling price (SSP) at contract inception.
Step
5 – Satisfaction of the Performance Obligations (and Recognize Revenue) – Revenue is recognized when (or as) goods
or services are transferred to a customer. The Company satisfies each of its performance obligations by transferring control of
the promised good or service underlying that performance obligation to the customer. Control is the ability to direct the use
of, and obtain substantially all of the remaining benefits from an asset. It includes the ability to prevent other entities from
directing the use of, and obtaining the benefits from an asset. Indicators that control has passed to the customer include: a
present obligation to pay; physical possession of the asset; legal title; risks and rewards of ownership; and acceptance of the
asset(s). Performance obligations can be satisfied at a point in time or over time.
Substantially
all of the Company’s revenues continue to be recognized when control of the goods are transferred to the customer, which
is upon shipment of the finished goods to the customer. All sales have fixed pricing and there are currently no material variable
components included in the Company’s revenue. Additionally, the Company will issue credits for defective merchandise, historically
these credits for defective merchandise have not been material. Based on the Company’s analysis of the new revenue standards,
revenue recognition from the sale of finished goods to customers, which represents substantially all of the Company’s revenues,
was not impacted by the adoption of the new revenue standards.
Disaggregation
of Revenue
The Company’s primary revenue streams
include the sale and/or licensing of consumer goods and packaging materials for innovative products. The Company’s licensing
business is not material and has not been separately disaggregated for segment purposes. The disaggregated Company’s revenues
for the three and six months ended June 30, 2019 and 2018 were as follows:
|
|
For
the Three Months
Ended June 30,
|
|
|
For
the Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
5,845,651
|
|
|
$
|
4,387,197
|
|
|
$
|
11,483,001
|
|
|
$
|
7,818,527
|
|
Service
|
|
|
22,714
|
|
|
|
-
|
|
|
|
48,311
|
|
|
|
-
|
|
Licensing
|
|
|
99,890
|
|
|
|
-
|
|
|
|
175,477
|
|
|
|
-
|
|
Total
revenues, net
|
|
$
|
5,968,255
|
|
|
$
|
4,387,197
|
|
|
$
|
11,706,789
|
|
|
$
|
7,818,527
|
|
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 2 —
Summary of Significant Accounting Policies — (Continued)
For
the three and six months ended June 30, 2019 and 2018, the following customer represented more than 10% of total net revenues:
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
27
|
%
|
|
|
23
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Customer B
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
%
|
For
the three and six months ended June 30, 2019 and 2018, the following geographical regions represented more than 10% of total net
revenues:
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
73
|
%
|
|
|
82
|
%
|
|
|
75
|
%
|
|
|
80
|
%
|
Asia-Pacific
|
|
|
*
|
|
|
|
15
|
%
|
|
|
*
|
|
|
|
17
|
%
|
Europe
|
|
|
18
|
%
|
|
|
*
|
|
|
|
18
|
%
|
|
|
*
|
|
*
Region did not represent greater than 10% of total net revenue.
Fair
Value of Financial Instruments
The
Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements
and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
Level
1 — quoted prices in active markets for identical assets or liabilities
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The
carrying amounts of the Company’s financial instruments, such as cash, accounts receivable, accounts payable, accrued expenses
and other current liabilities approximate fair values due to the short-term nature of these instruments. The carrying amount of
the Company’s notes payable approximates fair value because the effective yields on these obligations, which include contractual
interest rates, taken together with other features such as concurrent issuance of warrants, are comparable to rates of returns
for instruments of similar credit risk. The loan held for investment was acquired at fair value, which resulted in a discount.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
As
of June 30, 2019, the book value and estimated fair value of the Company’s level 3 instruments was as follows:
|
|
June
30, 2019
|
|
|
|
Book
Value
|
|
|
Estimated
Fair Value
|
|
Contingent consideration
|
|
$
|
(520,000
|
)
|
|
$
|
(520,000
|
)
|
The
following changes in level 3 instruments for the three months ended June 30, 2019 are presented below:
|
|
Contingent
Consideration –
Earnout
|
|
Balance, December 31, 2018
|
|
$
|
(520,000
|
)
|
Change in fair value
|
|
|
-
|
|
Balance, June 30, 2019
|
|
$
|
(520,000
|
)
|
The
following changes in level 3 instruments for the six months ended June 30, 2019 are presented below:
|
|
Contingent
Consideration –
Earnout
|
|
Balance, December 31, 2018
|
|
$
|
(520,000
|
)
|
Change in fair value
|
|
|
-
|
|
Balance, June 30, 2019
|
|
$
|
(520,000
|
)
|
There
were no changes to the underlying assumptions used in determining the fair value of the contingent consideration liability for
the three and six months ended June 30, 2019. There was no contingent consideration as of June 30, 2018.
Foreign
Currency Translation
The
Company uses the United States dollar as its functional and reporting currency since the majority of the Company’s revenues,
expenses, assets and liabilities are in the United States. Assets and liabilities in foreign currencies are translated using the
exchange rate at the balance sheet date, while revenue and expense accounts are translated at the average exchange rates prevailing
during the year. Equity accounts are translated at historical exchange rates. Gains and losses from foreign currency transactions
and translation for the three and six months ended June 30, 2019 and 2018 and the cumulative translation gains and losses as of
June 30, 2019 and December 31, 2018 were not material.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 2 —
Summary of Significant Accounting Policies — (Continued)
Net Earnings
or Loss per Share
Basic net loss
per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the
period. Diluted net income per common share is computed by dividing net income by the weighted average number vested of common
shares, plus the net impact of common shares (computed using the treasury stock method), if dilutive, resulting from the exercise
of dilutive securities. In periods when losses are reported, the weighted-average number of common shares outstanding excludes
common stock equivalents because their inclusion would be anti-dilutive. As of June 30, 2018, there were no common stock equivalents
outstanding. As of June 30, 2019, the Company excluded the common stock equivalents summarized below, which entitle the holders
thereof to ultimately acquire shares of common stock, from its calculation of earnings per share, as their effect would have been
anti-dilutive.
|
|
June 30,
|
|
|
|
2019
|
|
Selling Agent Warrants
|
|
|
65,626
|
|
Shares reserved in exchange for the cancellation
of certain non-voting membership interest in Edison Nation Holdings, LLC
|
|
|
990,000
|
|
Options
|
|
|
290,000
|
|
Convertible shares under notes payable
|
|
|
285,632
|
|
Shares to be issued to note
holders
|
|
|
20,000
|
|
|
|
|
|
|
Total
|
|
|
1,651,258
|
|
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
Recent
Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02) which amends the existing accounting standards
for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes
to lessor accounting. This accounting guidance is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2018, with early adoption permitted. Additionally, this accounting guidance requires a modified retrospective
transition approach for all leases existing at, or entered into after the date of initial application, with an option to use certain
transition relief. In July 2018, the FASB issued a practical expedient that would allow entities the option to apply the provisions
of the new lease guidance at the effective date of adoption without adjusting the comparative periods presented.
The
Company has elected the “package of practical expedients” and as a result is not required to reassess its prior accounting
conclusions about lease identification, lease classification and initial direct costs for lease contracts that exist as of the
transition date. However, the Company has not elected the use of hindsight for determining the reasonably certain lease term.
The
new lease standard also provides practical expedients and policy elections for an entity’s ongoing accounting. The Company
has elected the practical expedient to not separate lease and non-lease components for all of its leases. The Company has elected
the short-term lease recognition exemption, which results in no recognition of right-of-use assets and lease liabilities for existing
short-term leases at transition.
Upon
adoption on January 1, 2019, the Company recognized right of use assets for operating leases and operating lease liabilities that
have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum
lease payments. The right of use asset for operating leases is based on the lease liability. The Company did not have any deferred
rent or material prepaid rent.
The
cumulative effect of initially applying the new lease accounting standard as of January 1, 2019 is as follows:
|
|
January
1,
2019
|
|
|
Cumulative
Effect
Adjustment
|
|
|
January
1,
2019, as
adjusted
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Right of use assets
– operating leases
|
|
$
|
-
|
|
|
$
|
943,997
|
|
|
$
|
943,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of operating
lease liabilities
|
|
$
|
-
|
|
|
$
|
261,866
|
|
|
$
|
261,866
|
|
Operating lease liabilities,
net of current portion
|
|
$
|
-
|
|
|
$
|
682,131
|
|
|
$
|
682,131
|
|
The
adoption of the standard did not result in any material changes to the recognition of operating lease expenses in the Company’s
consolidated statements of operations.
In
June 2018, the FASB issued an amendment to the accounting guidance related to accounting for employee share-based payments which
clarifies that an entity should recognize excess tax benefits in the period in which the amount of the deduction is determined.
This amendment is effective for annual periods beginning after December 15, 2018. We have adopted this accounting guidance effective
January 1, 2019, with no impact on our financial statements as there were no excess tax benefits to be recognized due to our net
operating losses.
In
August 2018, the FASB issued new accounting guidance that addresses the accounting for implementation costs associated with a
hosted service. The guidance provides that implementation costs be evaluated for capitalization using the same criteria as that
used for internal-use software development costs, with amortization expense being recorded in the same income statement expense
line as the hosted service costs and over the expected term of the hosting arrangement. This guidance is effective for public
business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early
adoption permitted. The guidance will be applied either retrospectively or prospectively to all implementation costs incurred
after the date of adoption. We have not yet adopted this accounting guidance and are currently evaluating the effect this accounting
guidance will have on our financial statements.
In
August 2018, the FASB issued new accounting guidance that eliminates, adds and modifies certain disclosure requirements for fair
value measurements. Among the changes, an entity will no longer be required to disclose the amount of and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used
to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual
reporting periods beginning after December 15, 2019; early adoption is permitted. Since this accounting guidance only revises
disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.
In
October 2018, the FASB issued new accounting guidance for Variable Interest Entities, which requires indirect interests held through
related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision
makers and service providers are variable interests. The guidance is effective for the Company’s interim and annual reporting
periods during the year ending December 31, 2020. Early adoption is permitted. The Company currently does not believe that the
adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 2 —
Summary of Significant Accounting Policies — (Continued)
Subsequent
Events
The Company has evaluated subsequent events
through the date which the financial statements were issued. Based upon such evaluation, except for items described in Note 8
and Note 10, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment
or disclosure in the financial statements.
Segment
Reporting
The
Company uses “the management approach” in determining reportable operating segments. The management approach considers
the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions
and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating
decision maker is the Chairman and Chief Executive Officer (“CEO”) of the Company, who reviews operating results to
make decisions about allocating resources and assessing performance for the entire Company. The Company deploys resources on a
consolidated level to all brands of the Company and therefore the Company only identifies one reportable operating segment with
multiple product offerings.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
3 — Acquisition
On
September 4, 2018, the Company completed the acquisition of all of the voting membership interest of Edison Nation Holdings, LLC
for a total purchase price of $12,820,978 comprising of (i) $950,000 cash, (ii) the assumption of the remaining balance of the
senior convertible debt through the issuance to the holders of 4%, 5-year senior convertible notes (the “New Convertible
Notes”), in the aggregate principal and interest amount of the sum of $1,428,161, less debt discount of $500,000 for the
approximate fair value of the conversion feature, which are convertible into approximately 285,632 shares of the Company’s
common stock, at the option of the holder of such New Convertible Notes (subject to certain adjustments as provided in the Membership
Interest Purchase Agreement (the “Purchase Agreement”) among the Company and Edison Nation Holdings, LLC and Edison
Nation Holdings, LLC members dated June 29, 2018 and the terms of the New Convertible Notes), (iii) the reservation of 990,000
shares of the Company’s common stock that may be issued in exchange for the redemption of certain non-voting membership
interests of EN that will be created specifically in connection with the transaction contemplated by the Purchase Agreement (which
exchange obligations may be instead satisfied in cash instead of shares of common stock, in the Company’s sole discretion),
and (iv) the issuance of 557,084 shares or $3,760,317 of the Company’s common stock in full satisfaction of the indebtedness
represented by promissory notes payable by EN to Venture Six, LLC and Wesley Jones.
On
October 29, 2018, the Company completed the acquisition of 72.15% of the outstanding capital stock of Cloud B, Inc. in exchange
for 489,293 shares of restricted common stock of the Company. In addition, the Company entered into an Earn Out Agreement with
the Cloud B Sellers, whereby, beginning in 2019, the Company will pay the Cloud B Sellers an annual amount equal to 8% multiplied
by the annual gross sales of Cloud B, as reduced by the total gross sales generated by Cloud B in 2018. The Earn Out Agreement
expires on December 31, 2021.
On
December 31, 2018, the Company completed the acquisition of all of the voting membership interest of Pirasta, LLC from NL Penn
Capital, LP in exchange for the satisfaction of $470,000 due from related party. Accordingly, the consolidated financial statements
of the Company reflect the accounting of the combined acquired subsidiary at historical carrying values, except that equity reflects
a distribution for the excess of consideration paid over the net carrying amount of assets.
On
December 31, 2018, the Company completed the acquisition of 50% of the voting membership interest of Best Party Concepts, LLC
from NL Penn Capital, LP in exchange for the satisfaction of $500,000 due from related party. Accordingly, the consolidated financial
statements of the Company reflect the accounting of the combined acquired subsidiary at historical carrying values, except that
equity reflects a distribution for the excess of consideration paid over the net carrying amount of assets.
NL Penn Capital, LP is owned by Christopher B. Ferguson, our
Chairman and Chief Executive Officer.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 3 —
Acquisition — (Continued)
The
following represents the pro forma consolidated income statement as if the acquisitions had been included in the consolidated
results of the Company for the three and six months ended June 30, 2018:
|
|
Three
Months
Ended June 30,
2018
|
|
|
Six
Months
Ended June 30,
2018
|
|
Revenues, net
|
|
$
|
4,813,048
|
|
|
$
|
10,193,542
|
|
Cost of revenues
|
|
|
3,335,255
|
|
|
|
6,562,426
|
|
Gross profit
|
|
|
1,477,793
|
|
|
|
3,631,116
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
2,687,326
|
|
|
|
6,417,283
|
|
Operating
loss
|
|
|
(1,209,533
|
)
|
|
|
(2,786,167
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Other
(expense) income
|
|
|
(317,959
|
)
|
|
|
(419,072
|
)
|
Loss before
income taxes
|
|
|
(1,527,492
|
)
|
|
|
(3,205,239
|
)
|
Income tax expense
|
|
|
79,300
|
|
|
|
144,373
|
|
Net loss
|
|
$
|
(1,606,792
|
)
|
|
$
|
(3,349,612
|
)
|
Net
loss attributable to noncontrolling interests
|
|
|
(251,277
|
)
|
|
|
(280,890
|
)
|
Net
loss attributable to Edison Nation, Inc.
|
|
|
(1,355,515
|
)
|
|
|
(3,068,722
|
)
|
Net
loss per share - basic and diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.68
|
)
|
Weighted
average number of common shares outstanding – basic and diluted
|
|
|
4,973,081
|
|
|
|
4,512,289
|
|
Note
4 — Inventory
As
of June 30, 2019 and December 31, 2018, inventory consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
51,375
|
|
|
$
|
48,576
|
|
Finished goods
|
|
|
1,208,876
|
|
|
|
875,131
|
|
Total inventory
|
|
$
|
1,260,251
|
|
|
$
|
923,707
|
|
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Intangible assets,
net
As of June
30, 2019, intangible assets consisted of the following:
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Finite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
15 years
|
|
14.8 years
|
|
$
|
4,270,000
|
|
|
$
|
197,222
|
|
|
$
|
4,072,778
|
|
Developed technology
|
|
7 years
|
|
6.7 years
|
|
$
|
3,800,000
|
|
|
|
426,190
|
|
|
|
3,373,810
|
|
Membership network
|
|
7 years
|
|
6.7 years
|
|
$
|
1,740,000
|
|
|
|
207,144
|
|
|
|
1,532,856
|
|
Non-compete
agreements
|
|
2 years
|
|
1.7 years
|
|
$
|
50,000
|
|
|
|
20,833
|
|
|
|
29,167
|
|
Total finite lived intangible
assets
|
|
|
|
|
|
$
|
9,860,000
|
|
|
$
|
851,389
|
|
|
$
|
9,008,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
Indefinite
|
|
|
|
$
|
3,140,000
|
|
|
$
|
-
|
|
|
$
|
3,140,000
|
|
Total indefinite lived intangible
assets
|
|
|
|
|
|
$
|
3,140,000
|
|
|
$
|
-
|
|
|
$
|
3,140,000
|
|
Total intangible assets
|
|
|
|
|
|
|
13,000,000
|
|
|
$
|
851,389
|
|
|
$
|
12,148,611
|
|
As of December
31, 2018, intangible assets consisted of the following:
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Finite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
15 years
|
|
14.8 years
|
|
$
|
4,270,000
|
|
|
$
|
61,555
|
|
|
$
|
4,208,445
|
|
Developed technology
|
|
7 years
|
|
6.7 years
|
|
$
|
3,800,000
|
|
|
|
159,524
|
|
|
|
3,640,476
|
|
Membership network
|
|
7 years
|
|
6.7 years
|
|
$
|
1,740,000
|
|
|
|
82,857
|
|
|
|
1,657,143
|
|
Non-compete
agreements
|
|
2 years
|
|
1.7 years
|
|
$
|
50,000
|
|
|
|
8,333
|
|
|
|
41,667
|
|
Total finite lived intangible
assets
|
|
|
|
|
|
$
|
9,860,000
|
|
|
$
|
312,269
|
|
|
$
|
9,547,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
Indefinite
|
|
|
|
$
|
3,140,000
|
|
|
$
|
-
|
|
|
$
|
3,140,000
|
|
Total indefinite lived intangible
assets
|
|
|
|
|
|
$
|
3,140,000
|
|
|
$
|
-
|
|
|
$
|
3,140,000
|
|
Total intangible assets
|
|
|
|
|
|
|
13,000,000
|
|
|
$
|
312,269
|
|
|
$
|
12,687,731
|
|
The estimated
future amortization of intangibles subject to amortization at June 30, 2019 was as follows:
For the Years Ended
December 31,
|
|
Amount
|
|
2019 (excluding the six months ended June 30, 2019)
|
|
$
|
561,975
|
|
2020
|
|
|
1,092,762
|
|
2021
|
|
|
1,076,095
|
|
2022
|
|
|
1,076,095
|
|
2023
|
|
|
1,076,095
|
|
Thereafter
|
|
|
4,125,589
|
|
|
|
$
|
9,008,611
|
|
Amortization
expense for the three months ended June 30, 2019 and 2018 was $275,274 and $0, respectively. Amortization expense for the six
months ended June 30, 2019 and 2018 was $539,120 and $0, respectively.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Debt
As of June
30, 2019 and December 31, 2018, debt consisted of the following:
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Line of credit:
|
|
|
|
|
|
|
|
|
Asset backed line
of credit
|
|
$
|
771,407
|
|
|
$
|
561,804
|
|
Debt issuance
costs
|
|
|
(23,359
|
)
|
|
|
(30,000
|
)
|
Total line of credit
|
|
|
748,048
|
|
|
|
531,804
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes payable:
|
|
|
|
|
|
|
|
|
Senior convertible notes payable
|
|
|
2,539,272
|
|
|
|
1,428,161
|
|
Debt issuance
costs
|
|
|
(609,274
|
)
|
|
|
(466,667
|
)
|
Total long-term senior convertible notes payable
|
|
|
1,929,998
|
|
|
|
961,494
|
|
Less: current portion of long-term
notes payable
|
|
|
918,504
|
|
|
|
-
|
|
Noncurrent portion of long-term convertible notes
payable
|
|
|
1,011,494
|
|
|
|
961,494
|
|
|
|
|
|
|
|
|
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
913,550
|
|
|
|
370,250
|
|
Debt issuance
costs
|
|
|
(74,667
|
)
|
|
|
-
|
|
Total long-term debt
|
|
|
838,883
|
|
|
|
370,250
|
|
Less:
current portion of long-term debt
|
|
|
(789,214
|
)
|
|
|
(313,572
|
)
|
Noncurrent portion of long-term debt
|
|
|
49,669
|
|
|
|
56,688
|
|
|
|
|
|
|
|
|
|
|
Notes payable – related parties:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
3,423,194
|
|
|
|
3,464,191
|
|
Less:
current portion of long-term debt – related parties
|
|
|
(1,016,917
|
)
|
|
|
(932,701
|
)
|
Noncurrent portion of long-term debt – related
parties
|
|
$
|
2,406,277
|
|
|
$
|
2,531,490
|
|
Convertible Notes Payable
On March 6, 2019, Edison Nation entered
into a securities purchase agreement (the “SPA”) with an accredited investor (the “Investor”) pursuant
to which the Investor purchased a 2% unsecured, senior convertible promissory note (the “Note”) from the Company.
The Note was in the amount of $560,000 with an original issue discount of $60,000. The Company issued 15,000 shares of its common
stock valued at $74,100 based on the share price on the date of issuance to the Investor as additional consideration for the purchase
of the Note. The Under the terms of the SPA, the Investor will have “piggyback” registration rights in the event the
Company files a Form S-1 or Form S-3 within six months from March 6, 2019, as well as a pro rata right of first refusal in respect
of participation in any debt or equity financings undertaken by the Company during the 18 months following March 6, 2019. The
Company is also subject to certain customary negative covenants under the SPA, including but not limited to, the requirement to
maintain its corporate existence and assets subject to certain exceptions, and to not to make any offers or sales of any security
under circumstances that would have the effect of establishing rights or otherwise benefitting other investors in a manner more
favorable in any material respect than those rights and benefits established in favor of the Investor under the terms of the SPA
and the Note. The maturity date of the Note is six months from March 6, 2019. All principal amounts and the interest thereon are
convertible into shares of the Company’s common stock only in the event that an event of default occurs. The note was
paid in full in May 2019.
On May 13, 2019, the Company entered into
a series of 2% senior secured, senior convertible promissory notes of $1,111,111 with an original issue discount of $111,111.
The Company issued 20,000 shares of its common stock to the note holders as additional consideration for the purchase of the notes
in July 2019. The Company accrued $78,800 as a debt discount as of June 30, 2019 related to the value of the shares to be issued.
The notes are convertible upon default and mature on November 13, 2019. Under the terms of the notes, the note holders will have
“piggyback” registration rights.
Receivables
Financing
In April 2019,
we entered into a receivables financing arrangement for certain receivables of the Company. The agreement allows for borrowings
up to 80% of the outstanding receivable based on the credit quality of the customer. The fee is between 1% and 2% of the total
invoices financed.
Notes Payable
On May 16, 2019, the Company entered into
a non-interest bearing promissory note of $300,000, with an original issue discount of $50,000. The Company issued 20,000 shares
of its common stock to the note holder as additional consideration for the purchase of the note. The Company recorded $62,000
as a debt discount as of June 30, 2019 related to the value of the shares issued. The note matures on November 16, 2019.
On June 11, 2019, the Company entered
into 1.5% promissory note of $250,000. The interest and principal is due upon 30 days’ notice from the Lender, which cannot
be issued before August 11, 2019.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Debt — (Continued)
The scheduled
maturities of the debt for the next five years as of December 31, 2018, are as follows:
For the Years Ended
December 31,
|
|
Amount
|
|
2019
|
|
$
|
1,778,077
|
|
2020
|
|
|
239,461
|
|
2021
|
|
|
254,230
|
|
2022
|
|
|
704,296
|
|
2023
|
|
|
1,420,190
|
|
Thereafter
|
|
|
1,428,162
|
|
|
|
|
5,824,416
|
|
Less: debt discount
|
|
|
(496,667
|
)
|
|
|
$
|
5,327,749
|
|
For the three
and six months ended June 30, 2019, interest expense was $401,170 and $525,864, of which $79,374 and $159,636 was related party
interest expense, respectively. For the three and six months ended June 30, 2018, interest expense was $277,602 and $365,137,
of which $43,562 and $102,942 was related party interest expense, respectively.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Note 7 —
Related Party Transactions
NL Penn
Capital, LP and SRM Entertainment Group LLC
On December
31, 2018, the Company completed the acquisition of all of the voting membership interest of Pirasta, LLC from NL Penn Capital,
LP in exchange for the satisfaction of $470,000 due from related party. Accordingly, the consolidated financial statements of
the Company reflect the accounting of the combined acquired subsidiary at historical carrying values, except that equity reflects
a distribution for the excess of consideration paid over the net carrying amount of assets.
On December
31, 2018, the Company completed the acquisition of 50% of the voting membership interest of Best Party Concepts, LLC from NL Penn
Capital, LP in exchange for the satisfaction of $500,000 due from related party. Accordingly, the consolidated financial statements
of the Company reflect the accounting of the combined acquired subsidiary at historical carrying values, except that equity reflects
a distribution for the excess of consideration paid over the net carrying amount of assets.
As of June 30, 2019 and December 31, 2018,
due to related party consists of net amounts due to SRM Entertainment Group LLC (“SRM LLC”) and NL Penn Capital, LP
, the majority owner of both, which are owned by Chris Ferguson, our Chairman and Chief Executive Officer. The amount due to related
parties is related to the acquisitions of Pirasta, LLC and Best Party Concepts, LLC offset by operating expenses that were paid
by SRM and Edison Nation on behalf of SRM LLC and NL Penn Capital, LP. As of June 30, 2019 and December 31, 2018, the net amount
due to related parties was $75,082 and $140,682, respectively. Such amounts are due currently.
Service
Agreement
On August 1, 2018, the Company entered
into a one-year letter agreement with Enventys Partners, LLC, a North Carolina limited liability company (“Enventys”),
whereby Enventys agreed to provide services to the Company as an independent contractor in the areas of product development and
crowdfunding campaign marketing. During the term of the Enventys Agreement, the Company shall pay Enventys a fixed fee of $15,000
per month for product development assistance, including design research, mechanical engineering and quality control planning.
Depending on the success of each campaign, the Company may also pay Enventys a commission of up to ten percent of the total funds
raised in the applicable campaign. Louis Foreman, who is a member of the Company’s board of directors, is also the Chief
Executive Officer and the largest equity holder of Enventys. We incurred fees of approximately $3,500 and $75,500 related to the
services performed by Enventys for the three and months ended June 30, 2019, respectively. During 2019, the Company and Enventys
agreed to the cancellation of the agreement.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Note 8 —
Commitments and Contingencies
Operating
Leases
The Company
has entered into non-cancellable operating leases for office, warehouse, and distribution facilities, with original lease periods
expiring through 2021. In addition to minimum rent, certain of the leases require payment of real estate taxes, insurance, common
area maintenance charges, and other executory costs. Differences between rent expense and rent paid are recognized as adjustments
to operating lease right-of-use assets on the consolidated balance sheets.
As of June 30, 2019, the Company has operating
lease liabilities of $813,499 and right of use assets for operating leases of $802,223. During the three and six months ended
June 30, 2019, operating cash outflows relating to operating lease liabilities was $73,473 and $144,132, respectively, and the
expense for right of use assets for operating leases was $77,704 and $155,408, respectively. As of June 30, 2019, the Company’s
operating leases had a weighted-average remaining term of 3.7 years and weighted-average discount rate of 4.5%. Excluded from
the measurement of operating lease liabilities and operating lease right-of-use assets were certain office, warehouse and distribution
contracts that either qualify for the short-term lease recognition exception.
On August 8,
2016, SRM entered into a lease for office space in Kowloon, Hong Kong. On August 8, 2018, SRM extended its lease for office space
in Kowloon, Hong Kong so that the lease will now expire on August 7, 2020. Monthly lease payments are approximately $6,400 for
a total of approximately $154,000 for the total term of the lease.
Total rent expense for the three and six
months ended June 30, 2019 was $138,070 and $282,503, respectively. Total rent expense for the three and six months ended June
30, 2018 was $82,510 and $146,536, respectively. Rent expense is included in general and administrative expense on the Company’s
condensed consolidated statements of operations.
The following
is a reconciliation of future undiscounted cash flows to the operating liabilities, and the related right of use assets, included
in our Condensed Consolidated Balance Sheets as of June 30, 2019:
|
|
June
30,
2019
|
|
2019 (excluding the six months ended June 30, 2019)
|
|
|
148,458
|
|
2020
|
|
|
286,417
|
|
2021
|
|
|
237,377
|
|
2022
|
|
|
78,648
|
|
2023
|
|
|
78,648
|
|
2024 and thereafter
|
|
|
52,430
|
|
Total future lease payments
|
|
|
881,978
|
|
Less: imputed interest
|
|
|
(68,479
|
)
|
Present value of future operating lease payments
|
|
|
813,499
|
|
Less: current portion of operating
lease liabilities
|
|
|
(199,690
|
)
|
Operating lease liabilities,
net of current portion
|
|
|
613,809
|
|
Right of use assets –
operating leases, net
|
|
|
802,223
|
|
Rental Income
Fergco leases
a portion of the building located in Washington, New Jersey that it owns under a month to month lease. Rental income related to
the leased space for both the three months ended June 30, 2019 and 2018 was $25,704, respectively. Rental income related to the
leased space for both the six months ended June 30, 2019 and 2018 was $51,407, respectively. Rental income is included in other
income on the consolidated statements of operations.
Legal Contingencies
The Company
is involved in claims and litigation in the ordinary course of business, some of which seek monetary damages, including claims
for punitive damages, which are not covered by insurance. For certain pending matters, accruals have not been established because
such matters have not progressed sufficiently through discovery, and/or development of important factual information and legal
information is insufficient to enable the Company to estimate a range of possible loss, if any. An adverse determination in one
or more of these pending matters could have an adverse effect on the Company’s consolidated financial position, results
of operations or cash flows.
We are, and
may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business.
On July 15, 2019, the Company received
correspondence from the staff of the Arkansas Securities Commissioner in connection with the state’s notice filing requirements
for offerings exempt under Tier 2 of Regulation A, Section 18(b)(3) of the Security Act, such as the Company’s Form 1-A.
Pursuant to Arkansas’ securities laws, a filer must submit a notice filing with a requisite fee prior to any offers and
sales of securities made within the state. The staff of the Arkansas Securities Commissioner’s correspondence alleged a
violation of these Arkansas laws in connection with the Company’s initial public offering on Form 1-A. The Company has responded
to the correspondence, and is presently in discussions with the Arkansas Securities Department to enter into a consent order whereby
the Company will neither admit nor deny the allegations levied by the staff of the Arkansas Securities Commissioner.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Note 9 —
Stockholders’ Equity
Stock-Based
Compensation
On September
6, 2018, the Company’s board of directors approved an amendment and restatement of the Company’s omnibus incentive
plan solely to reflect the Company’s name change to Edison Nation, Inc. Thus, the Edison Nation, Inc. Omnibus Incentive
Plan (the “Plan”) which remains effective as of February 9, 2018, provides for the issuance of up to 1,764,705 shares
of common stock to help align the interests of management and our stockholders and reward our executive officers for improved
Company performance. Stock incentive awards under the Plan can be in the form of stock options, restricted stock units, performance
awards and restricted stock that are made to employees, directors and service providers. Awards are subject to forfeiture until
vesting conditions have been satisfied under the terms of the award. The exercise price of stock options are equal to the fair
market value of the underlying Company common stock on the date of grant.
The following
table represents total stock compensation expense by award type related to stock performance awards, restricted stock units, stock
options and awards made to non-employees, for the three and six months ended June 30, 2019 and 2018:
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock option awards
|
|
$
|
100,687
|
|
|
$
|
-
|
|
|
$
|
144,605
|
|
|
$
|
-
|
|
Non-employee awards
|
|
|
196,200
|
|
|
|
-
|
|
|
|
463,300
|
|
|
|
1,721,250
|
|
Restricted stock unit awards
|
|
|
-
|
|
|
|
306,000
|
|
|
|
-
|
|
|
|
306,000
|
|
Phantom stock awards
|
|
|
49,184
|
|
|
|
-
|
|
|
|
100,585
|
|
|
|
-
|
|
|
|
$
|
346,071
|
|
|
$
|
306,000
|
|
|
$
|
708,490
|
|
|
$
|
2,027,250
|
|
The stock-based
compensation is included in selling, general and administrative expense for the three and six months ended June 30, 2019 and 2018,
respectively.
Stock
option awards
The following
table summarizes stock option award activity for the six months ended June 30, 2019:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life in
Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance, January 1, 2019
|
|
|
290,000
|
|
|
$
|
5.55
|
|
|
|
4.2
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019
|
|
|
290,000
|
|
|
$
|
5.55
|
|
|
|
3.7
|
|
|
|
-
|
|
Exercisable, June 30, 2019
|
|
|
236,667
|
|
|
$
|
5.23
|
|
|
|
3.7
|
|
|
|
-
|
|
As of June 30, 2019, there was 53,333
unvested options to purchase shares of the Company’s common stock or $77,674 of total unrecognized equity-based compensation
expense that the Company expected to recognize over a remaining weighted-average period of 0.9 years.
Non-employee
awards
From time to
time, the Company grants shares of common stock to non-employee vendors for services performed. The awards are valued at the market
value of the underlying common stock at the date of grant and vest based on the terms of the contract which is usually upon grant.
Edison Nation,
Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10
— Subsequent Events
On July 16,
2019, the Company granted 20,000 shares to note holders related to the borrowing of $1,111,111 under notes payable.
On July 16,
2019, the Company granted 75,000 shares to vendors related to the performance of strategic consulting services.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Edison Nation:
End-to-end product innovation, development and commercialization
Edison Nation
is a vertically-integrated, end-to-end, consumer product research and development, manufacturing, sales and fulfillment company.
The Company
is the aggregation of five wholly owned subsidiaries whose operations and go-to-market strategy are vertically integrated under
the Edison Nation corporate umbrella.
During the
first quarter of 2019, Edison Nation rolled out its “One Company” initiative to integrate the acquired businesses
into one cohesive operation.
Edison Nation’s
cornerstone business driver is its proprietary web-enabled new product development and licensing platform (www.edisonnation.com)
that provides a low risk, high reward process to connect innovators of new product ideas with potential licensing partners.
Considered
to be the “go-to” resource for independent innovators with great consumer product invention ideas, Edison Nation engages
with over 140,000 registered online innovators and entrepreneurs to bring innovative, new products to market focusing on high-interest,
high-velocity consumer categories.
Since its inception,
Edison Nation has received over 100,000 idea submissions, with products selling in excess of $250 million at retail through the
management of over 300 client product campaigns with distribution across diverse channels including ecommerce, mass merchandisers,
specialty product chains, entertainment venues, national drug chains, and tele-shopping. These clients include many of the largest
manufacturers and retailers in the world including Amazon, Bed Bath and Beyond, HSN, Rite Aid, P&G, and Black & Decker.
Edison Nation
also creates, manufactures and markets its own products for the infant / toddler market under the Cloud b consumer brand name.
In addition, the Company leverages its vertically integrated resources and capabilities to create licensed consumer products for
large entertainment theme park enterprises, like Disney World and Universal Studios.
Edison Nation
also creates, manufactures and markets its own products including the infant / toddler market under the Cloud b consumer brand
name, innovative party products under the Best Party Concepts brand, and premium branded coloring activities under the Pirasta
brand. Recently the company launched product lines for 911 Help Now, Master Sous and Smarter Specs. In addition, the Company leverages
its vertically integrated resources and capabilities to create licensed consumer products for large entertainment theme park enterprises,
like Disney World and Universal Studios as well as custom packaging solutions for large and small U. S. Based companies.
Business
Model
New product
ideas have little value without the ability and skill required to commercialize them. The considerable investment and executional
“know how” needed to initiate a process - from idea to product distribution - has always been a challenge for the
individual innovator.
Edison Nation’s
business model is designed to take advantage of online marketplace and crowdfunding momentum for our future growth mitigating
new product development risk while allowing for optimized product monetization based on a product’s likelihood to succeed.
To that end,
Edison Nation empowers and enables innovators and entrepreneurs to develop and launch products, gain consumer adoption and achieve
commercial scale efficiently at little to no cost.
The Edison
Nation New Product Development & Commercialization Platform
Indeed, the
cornerstone of Edison Nation’s competitive advantage is its proprietary and web-enabled new product development (“NPD”)
and commercialization platform. The platform can take a product from idea through ecommerce final sale in a matter of months versus
a year or more for capital intensive and inefficient new product development protocols traditionally used by legacy manufacturers
serving “big box” retailers.
The Company’s
web-enabled NPD platform is designed to optimize product licensing and commercialization through best-in-class digital technologies,
sourcing / manufacturing expertise and one of the largest sets of go-to-market solutions. This unique set of resources and capabilities
have proven to be a reliable catalyst for sales success.
In order to
expand the Company’s universe of registered innovators and entrepreneurs submitting ideas on the Edison Nation NPD web platform,
the Company has entered a global agreement for distribution of two existing 13-episode seasons of the Company’s Everyday
Edison TV series with a leading digital media service company. The series will be available in its original English version as
well as voiceover adaptations in German, French, and Spanish. Distribution is planned for Europe and the Middle East through digital
content providers such as Amazon Prime Video.
Product
Submission Aggregation
Interested
innovators enter the Edison Nation web site to register for a free account by providing one’s name and email address. The
member then creates a username and password to use on the site. Once registered, the member is provided with their own unique,
password protected dashboard by which they can begin submitting ideas and join online member forums to learn about industry trends,
common questions, engage in member chats, and stay informed of the latest happenings at Edison Nation. They can also track the
review progress of ideas they submit through their dashboard.
Edison Nation
accepts ideas through a secure online submission process. Once a member explores the active searches in different product categories
being run on the platform for potential licensees seeking new product ideas to be commercialized, the member can submit their
new product ideas for processing. Edison Nation regularly works with different companies and retailers in various product categories
to help them find new product ideas.
Registered
members pay $25 to submit an idea. This submission fee covers a portion of the cost to review each idea submitted to the platform.
There are no additional fees after the submission fee.
Although the
platform might not have an active search that matches the innovator’s idea, the Edison Nation Licensing Team hosts an ongoing
search for new consumer product ideas in all categories.
“Insider
Membership” is Edison Nation’s premium level of membership. Insiders receive feedback on all their ideas submitted
and gain access to online features that aren't available to registered members. In addition, Insiders pay $20 for each idea submitted
(20% discount vs. a registered member), can opt-in ideas for free, as well as receive other benefits. An annual membership costs
$99, or $9.25 / month automatically debited from a credit card each month. Also included online is feedback to the innovator on
the status of each stage of the process and notification when ideas are not selected to move forward during any stage in the review
process.
Insiders also
have access to the Insider Licensing Program (the “ILP”). The primary benefit of the ILP is having the Edison Nation
Licensing team working directly on an innovator’s behalf to help secure a licensing agreement with one of the company’s
manufacturing partners. If an idea is selected for commercialization by a retail partner, Edison Nation will invest in any necessary
patent applications, filings and maintenance. The innovator’s name is included on any patent or patent application that
Edison Nation files on the member’s behalf after the idea has been selected.
In addition
to the above member programs, Edison Nation ASOTV (
“As Seen on TV”
) Team hosts a search for new products suitable
for marketing via DRTV and subsequent distribution in national retail chains including mass merchandisers, specialty retail, drug
chains and department stores.
Product
Submission Review
Led by the
Company’s NPD Licensing Team (which has over 150 years of combined experience in a variety of industries and product categories),
all ideas submitted by innovators through the Company’s website are reviewed and assessed through an 8-stage process. Edison
Nation’s product idea review process is confidential with non-disclosure agreements executed with every participating registered
or “Insider” member.
The NPD platform’s
database of over 85,000 product ideas helps determine which inventions have a substantial market opportunity quickly through proprietary
algorithms that have been developed incorporating continuous learning from marketplace experience and changes in category requirements.
Selected ideas
are assessed by the NPD Licensing Team based on nine key factors: competing products, uniqueness, retail pricing, liability &
safety, marketability, manufacturing cost, patentability, consumer relevant features and benefits, and commercial-ability.
The time required
to review ideas depends upon different variables, such as: the number of searches concurrently running on Edison Nation platform,
idea volume and complexity of the search, how many presentation dates to licensees are pending, the date an idea is submitted,
etc.
Presentation
dates to potential licensees are usually set a few weeks following the close of the search. After the presentation has been given
to a licensing / retail partner, the partner has 45 days to 6 months to select ideas on which they will move forward.
The Insider Licensing Program (ILP
program) incorporates a four-stage process:
|
·
|
Stage
#1 — Preliminary Review:
The NPD licensing team performs a preliminary
review to ensure an invention meets the program criteria. Factors that might stall an
idea from moving forward include: an invention is cost-prohibitive, has engineering challenges,
and/or major players in the marketplace have already launched products like it. If none
of these apply, an idea will be approved and move on to the preparation phase.
|
|
·
|
Stage
#2 — Preparation:
The NPD licensing team performs a best partner review.
Edison Nation’s retail and manufacturing contacts are assessed, and the team begins
to plan which licensors would be the best fit for an idea. A gap analysis and visits
the store shelves are executed to gain greater understanding of marketplace potential.
|
|
·
|
Stage
#3 — Pitching:
At this phase, an idea can become a “Finalist.”
The NPD team begins to proactively pitch an idea to potential licensees using a proprietary
presentation system. When a company expresses interest, the team proceeds into term sheets
and negotiations while staying in constant contact with the prospect until the best possible
deal is struck for the innovator.
|
|
·
|
Stage
#4 — Outcome:
In the end, the market decides what products will be successful.
There are no guarantees. If for some reason Edison Nation is not successful in finding
a licensing partner, a complete debrief is given to the Insider.
|
Due to the
public nature of licensing, Edison Nation only accepts ideas from Insiders that are patented or patent-pending. A valid provisional
patent application is required. The cost of submitting an idea to the Insider Licensing Program is $100, and a member must be
an “Insider” to be considered.
The Edison
Nation ASOTV new product development process follows a six-stage protocol appropriate for the broadcast-based sales channel. For
more information regarding the ASOTV process, the Edison Nation NPD platform, its features and member benefits, visit https://app.edisonnation.com/faq.
Acquisition
of Intellectual Property
Once an innovator’s
idea is judged to be a potentially viable, commercial product and selected for potential commercialization, the Company acquires
intellectual property rights from the innovator.
Once an innovator’s
intellectual property is secured, the innovator’s product idea can then either be licensed to a manufacturer or retailer,
or developed and marketed directly by Edison Nation. In either case, Edison Nation serves as the point-of-contact with the innovator
for term sheets, royalty negotiation and concluding licensing agreements. Edison Nation also maintains contact with the innovator
to keep them engaged during product development.
In general,
innovators are paid a percentage of the Company’s revenue from the commercialization of the innovator’s intellectual
property. This percentage varies with the Company’s investment in the development of the intellectual property, including
whether the Company decides to license the innovator’s idea for commercialization or instead, to directly develop and market
the innovator’s idea.
One Company
Initiative
During the
first quarter of 2019, Edison Nation began the process to consolidate all operating companies businesses into distinct business
units of Edison Nation, which allows the Company to focus on growing sales and leveraging operations. The units consist of:
• Innovate.
The Edison Nation Platform. Responsible for the innovation platform that helps inventors go from idea to reality. This is accomplished
by optimizing new product election process through deeper analytics to predict success on platforms like crowdfunding and web
market places like Amazon. Driving brand awareness of the platform by producing content for inventors and innovators on media
platforms including our own Everyday Edison’s television show.
• Build
and launch. Consolidating our teams of product designers and developers who take the product from the concept to the consumers
hand. These are distributed by geography, industry skillset and expertise in the development process to ensure efficient product
build and launch. The bulk of operations are part of this business unit, and the company will continue to develop this unit to
meet the needs of our product launch schedule.
• Sell.
Our Omni-channel sales effort is divided into three groups; (1) business-to-business revenue opportunities including traditional
brick and mortar retailers (2) online market places and direct-to-consumer revenue opportunities, and (3) our NiTRO Team (Near
Term Revenue Opportunities). NiTRO, identifies brands and products lines that would benefit from being part of Edison Nation.
The team seeks to a find a mutually beneficial transaction to accomplish that goal.
Product Design and Development
With product
design, product prototyping and creation of marketing assets all resourced with expert Edison Nation in-house capabilities, we
have made protracted, high-cost, high-risk research and development models obsolete.
Edison Nation
custom designs most products in-house for specific customers and their needs. We utilize our existing tooling to produce samples
and prototypes for customer reviews, refinement and approval, as well as our in-house packaging design and fabrication resources.
The Company’s
design and product development professionals are dedicated to the commercialization and marketability of new product concepts
advanced through the company’s NPD platform and for licensors / partners like Disney World and Universal Studios.
No matter the
product, Edison Nation’s objective is to optimize its marketability, function, value and appearance for the benefit of the
consumer end user. From concept and prototyping, through design-for-manufacture, special attention is paid to a product’s
utility, ease of use, lowest cost bill of materials, and how it “communicates” its features and benefits through design.
The combined experience and expertise
of the Company’s team spans many high-demand categories including household items, small appliances, kitchenware, and toys.
The Company’s in-house capabilities are complimented by third-party engineering and prototyping contractors, like Enventys
Partners, and category-specific expert resources within select manufacturers.
Paths to
Market
After an innovator’s
idea has been selected and then developed, Edison Nation’s NPD and commercialization platform - powered by team of experienced
licensing experts and backed by our scalable manufacturing and fulfillment supply chain infrastructure - provides innovators with
a clear and unencumbered set of paths to market.
Matching
the Innovation with the Licensing Community
Edison Nation
partners with many of the biggest and most well-known consumer products companies and retailers. They use the Company’s
platform as a “think engine” to develop targeted products, significantly reduce research and development expense,
and expedite time to market.
Each potential
licensee of an innovator’s idea publishes an exclusive page on the Edison Nation web site with innovation goals and timeline
for their search. Appropriate new product ideas are submitted in 100% confidence with all intellectual property safely guarded.
Once the search
concludes, Edison Nation presents each with the best patent protected, or patentable ideas that can be selected for development.
Licensing partners
and customers include Amazon, Bed, Bath & Beyond, Church & Dwight, Black & Decker, HSN, Worthington Industries, Pampered
Chef, Boston America Corp., Walmart, Target, PetSmart, “As Seen on TV,” Sunbeam, Home Depot, and Apothecary Products.
Online Marketplace and Crowdfunding
Edison Nation
has established a commercialization path to include the development and management of crowdfunding campaigns. This is evolving
to be a engine for future growth. The benefits of crowdfunding include increased product testing efficiency, decreased financial
risk, and the ability to get closer to the end consumer, simultaneously.
The ability
for consumers to re-order product not only gauges marketplace demand, but it can also be leveraged as a quantitative “proof
point” for potential sales to licensees. Most importantly, the money pledged for orders can be used to finance manufacturing
and ecommerce launch marketing costs as negative working capital.
Manufacturing,
Materials and Logistics
Once a product’s path to market
is successfully identified, Edison Nation produces and commercializes the product either through (1) licensing partnerships, or
(2) through a direct-to-market path via ecommerce or traditional retail distribution.
To provide greater flexibility in the
manufacturing and delivery of products, and as part of a continuing effort to reduce manufacturing costs, Edison Nation has concentrated
production of most of the Company’s products in third-party manufacturers located in China and Hong Kong. The Company maintains
a fully staffed Hong Kong office for sourcing, overseeing manufacturing and quality assurance.
Edison Nation’s contracted manufacturing
base continues to expand, from two major facilities to 4 to-date. These include two manufacturers required to produce Cloud B
children’s sleep products. Based on anticipated manufacturing requirements, this footprint may expand significantly by the
end of 2019. The Company also continues to explore more efficient and expert manufacturing partners to gain greater economies
of scale, potential consolidation, and cost savings on an on-going basis.
Products are
also purchased from unrelated enterprises with specific expertise in the design, development, and manufacture those specialty
products.
We base our
production schedules on customer orders and forecasts, considering historical trends, results of market research, and current
market information. Actual shipments of ordered products and order cancellation rates are affected by consumer acceptance of product
lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers,
and overall economic conditions. Unexpected changes in these factors could result in a lack of product availability or excess
inventory in a product line.
Most of our
raw materials are available from numerous suppliers but may be subject to fluctuations in price.
Sales, Marketing
and Advertising
Our Omni-channel sales effort is divided
into three groups: (1) business-to-business revenue opportunities including traditional brick and mortar retailers, (2) online
market places and direct-to-consumer revenue opportunities, and (3) our NiTRO Team (Near Term Revenue Opportunities). NiTRO, identifies
brands and products lines that would benefit from being part of Edison Nation. The team seeks to a find a mutually beneficial
transaction to accomplish that goal.
Edison Nation’s
business to business team sells products through a diverse network of manufacturers, distributors and retailers. New customer
prospects are gained through outbound sales calls, trade show participation, web searches, referrals from existing customers.
The online
team for the company has expertise in selling products on platforms such as the Amazon marketplace as well as portals like Walmart.com
and “crowd-funded”websites such as Kickstarter and Indiegogo.
The NiTRO team
identifies small, unique brands that could benefit from becoming part of a larger consumer products organization with more resources.
The team seeks to negotiate a mutually beneficial agreement whereby the respective branded products become part of Edison Nation’s
portfolio of consumer products.
In order to
expand the Company’s universe of registered innovators and entrepreneurs submitting ideas on the Edison Nation NPD web platform,
the Company has entered a global agreement for distribution of two existing 13-episode seasons of the Company’s Everyday
Edison TV series with a leading digital media service company. The series will be available in its original English version as
well as voiceover adaptations in German, French, and Spanish. Distribution is planned for Europe and the Middle East through digital
content providers such as Amazon Prime Video.
Sources of Revenue
The Company aggressively pursues
the following three sources of sales volume:
|
·
|
Our
branded products sold through traditional retail channels of distribution and other channels
of business to business distribution.
|
|
·
|
Our
branded products sold through direct to consumer platforms such as the Amazon marketplace
as well as portals like Walmart.com and “crowd-funded” websites such as Kickstarter
and Indiegogo.
|
|
·
|
Custom
products and packaging solutions that the Company develops and manufactures for partners
such as Disney, Marvel, Madison Square Garden and Universal Studios.
|
|
·
|
Member
idea submission and ILP program fees: $25 per submission (registered members); $20 per
submission (Insider members); $100 per submission (ILP members)
|
|
·
|
Licensing
agents
: We match an innovator’s intellectual property with vertical product
category leaders in a licensing structure whereby the innovator can earn up to 50% of
the contracted licensing fee. Product categories include kitchenware, small appliances,
toys, pet care, baby products, health & beauty aids, entertainment venue merchandise,
and housewares.
|
|
·
|
Product
principals
: We work with innovators directly, providing such innovators direct access
to all of Edison Nation’s resources. Depending on case-by-case factors, innovators
may receive a range of up to 35% - 50% of profits.
|
Market Overview
The process
for developing and launching consumer products has changed significantly in recent years. Previously, Fortune 500 and specialty
consumer product companies funded multimillion-dollar NPD divisions to develop and launch products. These products were sold primarily
on “big box” retail shelves supported by large marketing investments.
The emergence
of ecommerce giants, including Amazon and Walmart.com, has disrupted traditional NPD and commercialization paths and has accelerated
a consumer shift away from “brick and mortar” retailers. The result has been the bankruptcy or downsizing of many
iconic retailers, including Toys R Us, JC Penney, Macy’s, Sears, Kmart, Office Depot, Family Dollar, and K-B Toys, with
a commensurate loss of shelf space and accessible locations.
Moreover, crowdfunding
sites, like Kickstarter and Indiegogo, have also disrupted NPD process cycles and are now “main stream.” In fact,
as of October 2018, Kickstarter’s cumulative pledged funding exceeded $3.9 billion according to Kickstarter published data.
Statista.com estimates that crowdfunded sales of products will exceed $18.9 billion by 2021.
These crowdfunding
sites have enabled individual innovators and entrepreneurs to design, prototype and market unique products to millions of potential
customers with significantly lower acquisition costs when compared to the capital and time required by legacy NPD processes.
Leveraging Evolving Market Opportunities
for Growth
The Company
believes that its anticipated growth will be driven by five macro factors including:
|
·
|
The
significant growth of ecommerce (14% CAGR, estimated to reach $4.9 trillion by 2021 (eMarketer
2018);
|
|
·
|
The
increasing velocity of “brick and mortar” retail closures, now surpassing
Great Recession levels (Cushman & Wakefield / Moody’s Analytics 2018);
|
|
·
|
Product
innovation and immediate delivery gratification driving consumer desire for next-generation
products with
distinctive sets of features and benefits
without a reliance on brand awareness and familiarity;
|
|
·
|
The
rapid adoption of crowdsourcing to expedite successful new product launches; and
|
|
·
|
Utilizing
the opportunities to market products over the internet, rather than through traditional,
commercial channels, to reach a much broader, higher qualified target market for brands
and products.
|
In addition,
we believe that by leveraging our expertise in helping companies launch thousands of new products and our ability to create unique,
customized packaging, we intend to acquire small brands that have achieved approximately $1 million in retail sales over the trailing
twelve-month period with a track record of generating free cash flow. In addition, we will seek to elevate the value of these
acquired brands by improving each part of their launch process, based on our own marketing methodologies.
We believe
our acquisition strategy will allow us to acquire small brands using a combination of shares of our common stock, cash and other
consideration, such as earn-outs. We intend to use our acquisition strategy in order to acquire ten or more small brands per year
for the next three years. In situations where we deem that a brand is not a “fit” for acquisition or partnership,
we may provide the brand with certain manufacturing or consulting services that will assist the brand to achieve its goals.
One example is Cloud B (www.cloudb.com),
a leading manufacturer of products and accessories that help parents and children sleep better. The Company distributes its products
nationally and in over 100 countries worldwide.
Founded in 2002 and acquired by Edison
Nation in October 2018, Cloud B’s highly regarded, award-winning products are developed in consultation with an Advisory
Board of pediatricians and specialists. The Company recently won the Toy of the Year award from The Toy Association. Cloud B’s
best-known products are Twilight Turtle™ and Sleep Sheep™.
Cloud B’s products can be purchased
on-line (through its own ecommerce site and other online e-tailers), in specialty boutiques, gift stores, and worldwide at major
retailers including Barnes & Noble, Bloomingdales, Dillard’s, Nordstrom, Von Maur, Harrods of London, and FNAC in France.
Immediate synergies include expanding
Edison Nation’s West coast footprint by leveraging Cloud B’s sizeable distribution, sales and fulfillment operations.
In addition, Cloud B is leveraging the Edison Nation proprietary NPD platform, Hong Kong-based manufacturer sourcing and management
capabilities, and marketing and packaging resources.
Initial focus
since acquisition has been to optimize existing product performance, while helping to develop new product lines leveraging the
Edison Nation NPD platform.
Factors
Which May Influence Future Results of Operations
The following
is a description of factors which may influence our future results of operations, and which we believe are important to an understanding
of our business and results of operations.
Edison Nation
Holdings, LLC Transaction
On September 4, 2018, the Company completed
the acquisition of all of the voting membership interest of EN for a total purchase price of $11,776,696 comprising of (i) $950,000
cash (ii) the assumption of the remaining balance of the senior convertible debt through the issuance to the holders of 4%, 5-year
senior convertible notes (the “New Convertible Notes”), in the aggregate principal and interest amount of the sum
of $1,428,161, which are convertible into approximately 285,632 shares of the Company’s common stock, at the option of the
holder of such New Convertible Notes, (iii) the reservation of 990,000 shares of the Company’s common stock that may be
issued in exchange for the redemption of certain non-voting membership interests of EN and (iv) the issuance of 557,084 shares
of the Company’s common stock in satisfaction of the indebtedness represented by promissory notes payable by Edison Nation
with a total principal balance of $4,127,602.
Cloud B, Inc. Transaction
On October 29, 2018, the Company entered
into a Stock Purchase Agreement with a majority of the stockholders (the “Cloud B Sellers”) of Cloud B, Inc., a California
corporation (“Cloud B”). Pursuant to the terms of such Stock Purchase Agreement, the Company purchased 72.15% of the
outstanding capital stock of Cloud B in exchange for 489,293 shares of restricted common stock of the Company. In addition, the
Company entered into an Earn Out Agreement with the Cloud B Sellers, whereby, beginning in 2019, the Company will pay the Cloud
B Sellers an annual amount equal to 8% multiplied by the incremental gross sales of Cloud B over its 2018 gross sales level. The
Earn Out Agreement expires on December 31, 2021. CBAV1, LLC, a wholly-owned subsidiary of Edison Nation, Inc., owns the senior
secured position on the promissory note to Cloud B, Inc. in the amount of $2,270,000. In February 2019, CBAV1, LLC, pursuant to
an Article 9 foreclosure action, perfected its secured UCC interest in all the assets of Cloud B, Inc. to partially satisfy the
outstanding balance on the note and thereby making any payments of such Cloud B trade payables and notes unlikely in the future.
Non-Employee Director Compensation
On September 26, 2018, the Compensation
Committee of the board of directors approved the terms of compensation to be paid to non-employee directors for fiscal year 2018.
Compensation for non-employee directors includes an annual retainer of $15,000 and an award of options to purchase 20,000 shares
of the Company’s common stock. The restricted stock underlying such options will vest one year after the grant date. However,
the options have not yet been granted. In addition, the chair of each of the board’s committees shall receive an annual
committee meeting fee of $5,000.
Acquisition of Pirsata, LLC
On December 31, 2018, the Company completed
the acquisition of all of the voting membership interest of Pirasta, LLC from NL Penn Capital, LP in exchange for the satisfaction
of $470,000 due from related party. NL Penn Capital, LP is owned by Christopher B. Ferguson, our Chairman and Chief Executive
Officer. Accordingly, the consolidated financial statements of the Company reflect the accounting of the combined acquired subsidiary
at historical carrying values, except that equity reflects a distribution for the excess of consideration paid over the net carrying
amount of assets.
Acquisition of Best Party Concepts, LLC
On December 31, 2018, the Company completed
the acquisition of 50% of the voting membership interest of Best Party Concepts, LLC from NL Penn Capital, LP in exchange for
the satisfaction of $500,000 due from related party. NL Penn Capital, LP is owned by Christopher B. Ferguson, our Chairman and
Chief Executive Officer. Accordingly, the consolidated financial statements of the Company reflect the accounting of the combined
acquired subsidiary at historical carrying values, except that equity reflects a distribution for the excess of consideration
paid over the net carrying amount of assets.
Securities
Purchase Agreement
On March 6,
2019, Edison Nation, Inc. (the “Company”) entered into a securities purchase agreement (the “SPA”) with
an accredited investor (the “Investor”) pursuant to which the Investor purchased a 2% unsecured, senior convertible
promissory note (the “Note”) from the Company. The Company issued 15,000 shares of its common stock, par value $0.001
per share (“Common Stock”) to the Investor as additional consideration for the purchase of the Note. Under the terms
of the SPA, the Investor will have piggyback registration rights in the event the Company files a Form S-1 or Form S-3 within
six months from March 6, 2019, as well as a pro rata right of first refusal in respect of participation in any debt or equity
financings undertaken by the Company during the 18 months following March 6, 2019. The Company is also subject to certain customary
negative covenants under the SPA, including but not limited to, the requirement to maintain its corporate existence and assets
subject to certain exceptions, and to not to make any offers or sales of any security under circumstances that would have the
effect of establishing rights or otherwise benefitting other investors in a manner more favorable in any material respect than
those rights and benefits established in favor of the Investor under the terms of the SPA and the Note. The maturity date of the
Note is six months from March 6, 2019. All principal amounts and the interest thereon are convertible into shares Common Stock
only in the event that an Event of Default occurs.
Receivables
Financing
In April 2019,
we entered into a receivables financing arrangement for certain receivables of the Company. The agreement allows for borrowing
up to 80% of the outstanding receivable based on the credit quality of the customer. The fee is between 1% and 2% of the total
invoice financed.
Critical
Accounting Policies and Significant Judgments and Estimates
Our management’s
discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.
The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial
statements as well as the reported expenses during the reporting periods. The accounting estimates that require our most significant,
difficult and subjective judgments have an impact on revenue recognition, the determination of share-based compensation and financial
instruments. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates
under different assumptions or conditions.
Our significant
accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q.
Components
of our Results of Operations
Revenues
We sell consumer
products across a variety of categories, including toys, plush, homewares and electronics, to retailers, distributors and manufacturers.
We also sell consumer products directly to consumers through e-commerce channels.
Cost
of Revenues
Our cost of
revenues includes inventory costs, materials and supplies costs, internal labor costs and related benefits, subcontractor costs,
depreciation, overhead and shipping and handling costs.
Selling,
General and Administrative Expenses
Selling, general
and administrative expenses consist of selling, marketing, advertising, payroll, administrative, finance and professional expenses.
Rental
Income
We earn rental
income from a month-to-month lease on a portion of the building located in Washington, New Jersey that we own.
Interest
Expense, Net
Interest expense
includes the cost of our borrowings under our debt arrangements.
Results
of Operations
Three
Months Ended June 30, 2019 versus Three Months Ended June 30, 2018
The following
table sets forth information comparing the components of net (loss) income for the three months ended June 30, 2019 and 2018:
|
|
Three Months Ended June
30,
|
|
|
Period over Period Change
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Revenues, net
|
|
$
|
5,968,255
|
|
|
$
|
4,387,197
|
|
|
$
|
1,581,058
|
|
|
|
36.0
|
%
|
Cost of revenues
|
|
|
3,924,252
|
|
|
|
3,124,221
|
|
|
|
800,031
|
|
|
|
25.6
|
%
|
Gross profit
|
|
|
2,044,003
|
|
|
|
1,262,976
|
|
|
|
781,027
|
|
|
|
61.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,392,596
|
|
|
|
1,658,438
|
|
|
|
1,734,158
|
|
|
|
104.6
|
%
|
Operating loss
|
|
|
(1,348,593
|
)
|
|
|
(395,462
|
)
|
|
|
(953,131
|
)
|
|
|
241.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
25,703
|
|
|
|
25,703
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Interest expense
|
|
|
(401,170
|
)
|
|
|
(277,602
|
)
|
|
|
(123,568
|
)
|
|
|
44.5
|
%
|
Total expense
|
|
|
(375,467
|
)
|
|
|
(251,899
|
)
|
|
|
(123,568
|
)
|
|
|
49.1
|
%
|
Loss before income taxes
|
|
|
(1,724,060
|
)
|
|
|
(647,361
|
)
|
|
|
(1,076,699
|
)
|
|
|
166.3
|
%
|
Income tax expense
|
|
|
51,005
|
|
|
|
79,300
|
|
|
|
(28,295
|
)
|
|
|
(35.7
|
)%
|
Net loss
|
|
|
(1,775,065
|
)
|
|
|
(726,661
|
)
|
|
|
(1,048,404
|
)
|
|
|
144.3
|
%
|
Net loss attributable to noncontrolling
interests
|
|
|
(39,648
|
)
|
|
|
-
|
|
|
|
(39,648
|
)
|
|
|
-
|
|
Net loss attributable to Edison
Nation, Inc.
|
|
$
|
(1,735,417
|
)
|
|
$
|
(726,661
|
)
|
|
$
|
(1,008,756
|
)
|
|
|
138.8
|
%
|
Revenue
For the three
months ended June 30, 2019, revenues increased by $1,581,058 or 36.0%, as compared to the three months ended June 30, 2018. The
increase was primarily attributable to new business in connection with our acquisitions in 2018. The increase includes licensing
related revenues related to our acquisition of Edison Nation Holdings, LLC and product revenues related to our acquisition of
Cloud B, Inc.
Cost of Revenues
For the three months ended June 30, 2019,
cost of revenues increased by $800,031 or 25.6%, as compared to the three months ended June 30, 2018. The increase was primarily
attributable to the increase in total consolidated revenues.
Gross
Profit
For the three months ended June 30, 2019,
gross profit increased by $781,027, or 61.8%, as compared to the three months ended June 30, 2018. The increase was primarily
a result of the increase in revenues. For the three months ended June 30, 2019, gross margin increased to 34.2%, as compared to
28.8% for the three months ended June 30, 2018. The increase in gross margin was due to product mix of goods sold to customers
related to our Cloud B and Edison Nation Holdings, LLC acquisitions.
Operating
Expenses
Selling, general and administrative expenses
were $3,392,596 and $1,658,438 for the three months ended June 30, 2019 and 2018, respectively, representing an increase of $1,734,158,
or 104.6%. The increase was primarily the result of additional operating expense related to Edison Nation Holdings, LLC and Cloud
B, Inc. The larger costs include increases in wages and benefits of approximately $375,000, depreciation and amortization of approximately
$293,000, professional and consulting fees of approximately $556,000 relating primarily to the integration of acquisitions and
stock compensation of approximately $40,000 offsetting the expenses. The wage increase relates primarily to a growth initiative
whereby new staff will design, build and launch new products for the Company.
Rental
Income
Rental income
was $25,703 for both the three months ended June 30, 2019 and 2018.
Interest
expense
Interest expense
was $401,170 for the three months ended June 30, 2019 versus $277,602 in the previous three months ended June 30, 2018. The increase
in interest expense was related to increased borrowings of debt during 2019.
Income
tax expense
Income tax
expense was $51,005 for the three months ended June 30, 2019, a decrease of $28,295 or 35.7%, compared to $79,300 for the three
months ended June 30, 2018. The decrease was primarily due to the decrease in income from our foreign operations with no offset
for income in the United States.
Six Months
Ended June 30, 2019 versus Six Months Ended June 30, 2018
The following
table sets forth information comparing the components of net (loss) income for the six months ended June 30, 2019 and 2018:
|
|
Six Months Ended June
30,
|
|
|
Period over Period Change
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Revenues, net
|
|
$
|
11,706,789
|
|
|
$
|
7,818,527
|
|
|
$
|
3,888,262
|
|
|
|
49.7
|
%
|
Cost of revenues
|
|
|
7,869,810
|
|
|
|
5,453,215
|
|
|
|
2,416,595
|
|
|
|
44.3
|
%
|
Gross profit
|
|
|
3,836,979
|
|
|
|
2,365,312
|
|
|
|
1,471,667
|
|
|
|
62.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
6,441,784
|
|
|
|
4,211,175
|
|
|
|
2,230,609
|
|
|
|
53.0
|
%
|
Operating loss
|
|
|
(2,604,805
|
)
|
|
|
(1,845,863
|
)
|
|
|
(758,942
|
)
|
|
|
41.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
51,407
|
|
|
|
51,407
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Interest expense
|
|
|
(525,864
|
)
|
|
|
(365,137
|
)
|
|
|
(160,727
|
)
|
|
|
44.0
|
%
|
Total other expense
|
|
|
(474,457
|
)
|
|
|
(313,730
|
)
|
|
|
(160,727
|
)
|
|
|
51.2
|
%
|
Loss before income taxes
|
|
|
(3,079,262
|
)
|
|
|
(2,159,593
|
)
|
|
|
(919,669
|
)
|
|
|
42.6
|
%
|
Income tax expense
|
|
|
74,200
|
|
|
|
144,373
|
|
|
|
(70,173
|
)
|
|
|
(-48.6
|
)%
|
Net loss
|
|
|
(3,153,462
|
)
|
|
|
(2,303,966
|
)
|
|
|
(849,496
|
)
|
|
|
36.9
|
%
|
Net income attributable to noncontrolling
interests
|
|
|
17,245
|
|
|
|
-
|
|
|
|
17,245
|
|
|
|
|
|
Net loss attributable to Edison
Nation, Inc.
|
|
$
|
(3,170,707
|
)
|
|
$
|
(2,303,966
|
)
|
|
$
|
(866,741
|
)
|
|
|
37.6
|
%
|
Revenue
For the six
months ended June 30, 2019, revenues increased by $3,888,262 or 49.7%, as compared to the six months ended June 30, 2018. The
increase was primarily attributable to new business in connection with our acquisitions in 2018. The increase includes licensing
related revenues related to our acquisition of Edison Nation Holdings, LLC and product revenues related to our acquisition of
Cloud B, Inc.
Cost of Revenues
For the six months ended June 30, 2019,
cost of revenues increased by $2,416,595 or 44.3%, as compared to the six months ended June 30, 2018. The increase was primarily
attributable to the increase in total consolidated revenues.
Gross
Profit
For the six months ended June 30, 2019,
gross profit increased by $1,471,667, or 62.2%, as compared to the six months ended June 30, 2018. The increase was primarily
a result of the increase in revenues. For the six months ended June 30, 2019, gross margin increased to 32.8%, as compared to
30.3% for the six months ended June 30, 2018. The increase in gross margin was due mostly to favorable product mix of goods sold
to customers related to our Cloud B acquisition.
Operating
Expenses
Selling, general and administrative expenses
were $6,441,784 and $4,211,175 for the six months ended June 30, 2019 and 2018, respectively, representing an increase of $2,230,609,
or 53.0%. The increase was primarily the result of operating expense incurred related to Edison Nation Holdings, LLC and Cloud
B, Inc. The larger costs include increases in wages and benefits of approximately $998,000, depreciation and amortization of approximately
$559,000, rent of approximately $147,000, professional and consulting fees of approximately $1,069,000 relating primarily to the
integration of acquisitions, freight and postage of approximately $139,000, travel of approximately $120,000, computer, internet
and website of approximately $84,000. In addition, there was a decrease of stock compensation of approximately $1,300,000 offsetting
the expenses. The wage increase relates primarily to a growth initiative whereby new staff will design, build and launch new products
for the Company.
Rental
Income
Rental income
was $51,407 for both the six months ended June 30, 2019 and 2018.
Interest
expense
Interest expense was $525,864, an increase
of 44.0%, for the six months ended June 30, 2019 versus $365,137 in the previous six months ended June 30, 2018. The increase
in interest expense was related to increased borrowings of debt during 2019.
Income
tax expense
Income tax
expense was $74,200 for the six months ended June 30, 2019, a decrease of $70,173 or 48.6%, compared to $144,373 for the six months
ended June 30, 2018. The decrease was primarily due to the decrease in income from our foreign operations related to management
fees as well as net operating losses for our domestic operations.
Non-GAAP
Measures
EBITDA
and Adjusted EBITDA
The Company
defines EBITDA as net loss before interest, taxes and depreciation and amortization. The Company defines Adjusted EBITDA as EBITDA,
further adjusted to eliminate the impact of certain non-recurring items and other items that we do not consider in our evaluation
of our ongoing operating performance from period to period. These items will include stock-based compensation, restructuring and
severance costs, transaction costs, acquisition costs, certain other non-recurring charges and gains that the Company does not
believe reflects the underlying business performance.
For the three
and six months ended June 30, 2019 and 2018, EBITDA and Adjusted EBITDA consisted of the following:
|
|
Three Months
Ended June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net (loss) income
|
|
$
|
(1,775,065
|
)
|
|
$
|
(726,661
|
)
|
|
$
|
(3,153,462
|
)
|
|
$
|
(2,303,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
401,170
|
|
|
|
277,602
|
|
|
|
525,864
|
|
|
|
365,137
|
|
Income tax expense
|
|
|
51,005
|
|
|
|
79,300
|
|
|
|
74,200
|
|
|
|
144,373
|
|
Depreciation and amortization
|
|
|
332,187
|
|
|
|
39,631
|
|
|
|
633,570
|
|
|
|
79,262
|
|
EBITDA
|
|
|
(990,703
|
)
|
|
|
(330,128
|
)
|
|
|
(1,919,828
|
)
|
|
|
(1,715,194
|
)
|
Stock-based compensation
|
|
|
346,071
|
|
|
|
306,000
|
|
|
|
708,490
|
|
|
|
2,027,250
|
|
Restructuring and severance costs
|
|
|
134,597
|
|
|
|
18,000
|
|
|
|
170,982
|
|
|
|
18,000
|
|
Transaction and acquisition costs
|
|
|
-
|
|
|
|
150,702
|
|
|
|
223,538
|
|
|
|
150,702
|
|
Other non-recurring costs
|
|
|
519,191
|
|
|
|
63,386
|
|
|
|
623,365
|
|
|
|
63,386
|
|
Adjusted EBITDA
|
|
$
|
9,156
|
|
|
$
|
207,960
|
|
|
$
|
(193,453
|
)
|
|
$
|
544,144
|
|
EBITDA and
Adjusted EBITDA is a financial measure that is not calculated in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). Management believes that because Adjusted EBITDA excludes (a) certain
non-cash expenses (such as depreciation, amortization and stock-based compensation) and (b) expenses that are not reflective
of the Company’s core operating results over time (such as restructuring costs, litigation or dispute settlement charges
or gains, and transaction-related costs), this measure provides investors with additional useful information to measure the Company’s
financial performance, particularly with respect to changes in performance from period to period. The Company’s management
uses EBITDA and Adjusted EBITDA (a) as a measure of operating performance, (b) for planning and forecasting in future periods,
and (c) in communications with the Company’s board of directors concerning the Company’s financial performance. The
Company’s presentation of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of
other companies due to different methods of calculation and should not be used by investors as a substitute or alternative to
net income or any measure of financial performance calculated and presented in accordance with U.S. GAAP. Instead, management
believes EBITDA and Adjusted EBITDA should be used to supplement the Company’s financial measures derived in accordance
with U.S. GAAP to provide a more complete understanding of the trends affecting the business.
Although Adjusted
EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations
as an analytical tool, and investors should not consider it in isolation or as a substitute for, or more meaningful than, amounts
determined in accordance with U.S. GAAP. Some of the limitations to using non-GAAP measures as an analytical tool are (a) they
do not reflect the Company’s interest income and expense, or the requirements necessary to service interest or principal
payments on the Company’s debt, (b) they do not reflect future requirements for capital expenditures or contractual commitments,
and (c) although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often
have to be replaced in the future, and non-GAAP measures do not reflect any cash requirements for such replacements.
Liquidity
and Capital Resources
For the three and six months ended June
30, 2019, our operations lost $1,348,593 and $2,604,805, respectively. At June 30, 2019, we had total current assets of approximately
$6,700,000 and current liabilities of approximately $12,400,000 resulting in negative working capital of approximately $5,700,000.
At June 30, 2019, we had total assets of approximately $30,400,000 and total liabilities of approximately $17,000,000 resulting
in stockholders’ equity of approximately $13,400,000.
The foregoing factors raised initial concerns
about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon
the Company’s ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies
and achieve profitable operations from the sale of its products. The consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern. The following is additional information on our
operating losses and working capital:
The Company’s operating loss included
$678,258 and $1,342,060 related to depreciation, amortization and stock-based compensation. In addition, approximately $654,000
and $1,000,000, respectively, was related to transaction costs, restructuring charges and other non-recurring and redundant costs
which are being removed or reduced. The negative working capital includes approximately $3,800,000 related to unsecured trade
payables in our Cloud B acquisition. In addition, our outstanding balances under notes payable includes $0.9 million related to
Cloud B, Inc. CBAV1, LLC, a wholly-owned subsidiary of Edison Nation, Inc., owns the senior secured position on the promissory
note to Cloud B, Inc. in the amount of $2,270,000. In February 2019, CBAV1, LLC, pursuant to an Article 9 foreclosure action,
perfected its secured UCC interest in all the assets of Cloud B, Inc. to partially satisfy the outstanding balance on the note
and thereby making any payments of such Cloud B trade payables and notes unlikely in the future. In addition, S.R.M Entertainment
Limited, a wholly-owned subsidiary of Edison Nation, Inc., was an unsecured creditor in the amount of approximately $1,700,000
which is not included in the $3,800,000 but at this time remains unpaid. The total liabilities of approximately $6,400,000, of
which $1,700,000 has been eliminated in consolidation, are not expected to be satisfied due to the foreclosure.
Management has considered possible mitigating
factors within our management plan on our ability to continue for at least a year from the date these financial statements are
filed. The following items are management plans to alleviate any going concern issues:
|
·
|
Cloud B, Inc. liabilities are unlikely to be paid
due to CBAV1 LLC holding the senior secured position and its rights under the foreclosure to the remaining assets of the entity
to satisfy the outstanding obligation.
|
|
·
|
Raise further capital through the sale of additional equity;
|
|
·
|
Borrow money under debt securities;
|
|
·
|
The deferral of payments to related party debt holders for both principal
of approximately $1,000,000 and related interest expense;
|
|
·
|
Cost saving initiatives related to synergies
and the elimination of redundant costs of approximately $500,000, of which approximately $172,000 impacted the three months
ended June 30, 2019; and
|
|
·
|
Possible sale of certain brands to other manufacturers.
|
Our operating
needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures.
Our future capital requirements and the adequacy of our available funds will depend on many factors, including our ability to
successfully commercialize our products and services, competing technological and market developments, and the need to enter into
collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service
offerings.
Cash Flows
During the six months ended June
30, 2019 and 2018, our sources and uses of cash were as follows:
Cash
Flows from Operating Activities
Net cash used in operating activities
for the six months ended June 30, 2019 was $1,915,353, which included a net loss of $3,153,462. That net loss included $650,582
of cash used by changes in operating assets and liabilities, which were offset by stock-based compensation of $708,490, depreciation
and amortization of $633,570, amortization of debt issuance costs of $391,223 and amortization of right of use assets of $155,408.
Net cash used in operating activities for the six months ended June 30, 2018 was $1,279,495, which included a net loss of $2,303,966.
That net loss included $1,348,985 of cash used by changes in operating assets and liabilities which was offset by stock-based
compensation of $2,027,250 and amortization of debt issuance costs of $266,944.
Cash Flows from Investing
Activities
Cash used in investing activities for
the six months ended June 30, 2019 was $106,770 which related to the purchase of property and equipment. Cash used in investing
activities for the six months ended June 30, 2018 was $527,462 which related to the purchase of a loan held for investment of
$500,000 and the purchase of property and equipment of $27,462.
Cash Flows from Financing
Activities
Cash provided by financing activities
for the six months ended June 30, 2019 was $1,394,451 which related mostly to net cash received borrowings under new debt instruments
offset by repayments. Cash provided by financing activities for the six months ended June 30, 2018 was $5,180,533 which related
to borrowings under two notes payable.
Off-Balance Sheet Arrangements
We did not
have, during the periods presented, and we do not currently have, any relationships with any organizations or financial partnerships,
such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.